576

4corporations Dlvidendsf Retained EarningsJ and lncome Reporting

Terms are highhghted in bIue throughoutthc chaptc

Cash d idend A pro rata distribud n of cash to stock~ holdcrs,

Reta ned

earnings restrictions Circumstanccs 1

|

make a poI ion of retained earnings currcndy unaI able for dividends

DecIaration date The date the b ard of directors fo ma11y dcclares(authorizes)a dividcnd and announces
it to st ckholdcrs

Retained earnings statement A

yca

nancial statem:= that shoxxrs the changcs in retained carnings during=

Def:cit A dcbit balance in retaincd earnings.

Di idend

Return on co lmon stockhoIdersf equity A lmcaxL

A corporation distribuJon f cash or stock

to its stockh ldcrs n a pro rata(proportional)basis.

of pr ntab ity that shows h w many do ars of | income were carncd for cach do1lar investcd b t

Earnings per share The nct income carned by each

share f outstanding common stock

oxvncrs; computed as nct income n1inus prefe

Iit

Liquidating di idend A dividend declared out of paidin capital

dividcnds dividcd by average co 11n0n stockhol :| equity stock di idend A pro rata distribudon to stockh lj
of the col poration
o vn

Payment date Thc date dividcnd chccks arc1nailed to

stockholdcrs

stock

stockhoIdersJ equ:ty statement A statcment

shovs the changesin each st ckholdcrs

Prior period adJustment The co ection of an e or

previously issued Jf:inancial statemcnts.

equity acc[

in

and in t ta1st ckh lders cquity during the ycan

Record date The date xxJhcn oxvnership of utstanding

sharcs is dctcr 1incd for dividend purposes

stock sp t The issuance of additional shares of stocL1t

stockh lders according to their pcrcentage o /nep I; It is accompanicd by a reduction in thc par or st I : valuc per share,

Retained earnings Nctincome that a company retains

in thc busincss.

(L01)

1 Entries for cash dividcnds are rcquircd on thc

'4L9zs

/~s ,zB/o d lz 9zbo

lbfrr P rsp cr v

(a) dcclarati n date and thc payment date, (b) rccord date and thc payment date, (c) dcclaration date,rccord date,and payment date.

5. Rapt r Inc. has rctaincd earnings of $500,000 total stockholders equity of$2,000,000 It has1oo C|

shares of$8 par valuc common stock outstand

which is currcntly se11ing for$3o pcr share,If Ra

(d) declarauon datc and the rcc rd date.

(LO1) 2

Which of the fo11oxving statemcnts about sma11stock

dividends is trueP (a) A debit to Rctaincd Earnings f r the par valuc of thc sharcs issucd should be rnade,

declares a10%stock dividend n its co 11110n stOJl (a) net inc mc l1decrcase by$80,000

1i

(b) A sma11 stock dividcnd decrcases total stock~

holdcrs equitl/.

y equity
and t tal stockho1ders $300,000.
o11 increas
-

(b)hhCd earnhgs wi11dcc asc by$80,000=

(c) Iarkct pricc per sharc should bc assigned t the

div1dcnd shares,

(d) retained carnings o11dccrcase by$300,000= total paid in capital w l increase by$300,00C

(d) A smal1 stock div1dend rdinarny 1l havc an

effcct on par valuc per sharc of stock
(LO1) 3

6. Which f

thc fo

o ng

can cause a restricti

retained carnings? `s regarding treasury stock (b) Longtcrn1debt contract tcrms

(a) State la

Vhich of the fo11o ng statemcnts about a 3~fo

stock sphtis true?

(L01)

Encorc Inc deClared an$8o,000cash dividcnd It cu

if : f

(a)It wil1tnplc thc markct price f the stock.

(c) Authoriza ons by thc board of dircct (d) A11ofthc ab ve.

rs in li

of planncd expansion of c rporatc fac ities

7. A11but one ofthe fo11 `ing is is reponcd in a retai carnings statement.The cxception (a) cash and stock dividcnds,
(b) nct inc me and nctl ss

rendy has3,0oo shares of7%,$100par va1uc cumulative prcferrcd stock utstanding. It is one year in a ears on its prcferrcd stock.Hoxkr much cash will Encorc distributc to thc c 1In0n stockholdersP (a) $38,000 (c) $59,000 (b) $42,000 (d)None

(c) salcs revcnuc. (d)prior pcri da ustments

8.A pr0r period a ustmcnt

itern.

is

(a) reported in thc i11come statemcnt as a nont

Ti

Questions
(b) a corrcction of an error that is recordcd dircct1y to retained carnings equny scction (c) repolted direcdy in the stockho1dcr
12.

577

During2014,Ta1on Inc had sales revcnuc$376,000, (LO4)

7fJ
C

6f

tt:i n :tT% : carnlngs.

In the stockholdcrs cquity section, Co1nmon stock
Dividends Distributable is repolied as a(n)

: :st:: n:

:: J l;t

x : :

::

Vhatxvas Talon $20,000 Its corporatc tax rate is30% income tax expcnse for thc year?

(c) $112,800 (d)$27,000, (b) $52,800 13.Corporauon inc mc statcmcnts may bc the samc as (LO4)
(a) $18,000, thc income statemcnts for unincorporatcd companies
except for

^9

(a) deduction olll tota1paid in capital and rctaincd

earn1ngs, (b) addition to additional paid-in capita1 (c) dCduchon f1 on retained earnings (d) additl n to capita1stock

(a) gross pro t

(b) incomc taX expcnse (c) perating income.

(d)net sa1es.

Katic Inc. rcportcd nct incomc of $186,000 during

2014and paid dividends of$26,000on con11non stoCk

14.If cvewthing e1sc is hc1d constant,earnings per sharc (LO5)

1s lncrcased by

It also has10,000shares of693,$100par value,noncumu1ative prefcrred stock outstanding and paid divi-

Co1nmon dends of $60,000 on prefcrred stock stockholders equity xvas $1,200,000 on January 1,
2014, and $1,600,000 on Dccember 31, 2014 Thc
company1rcturn on common stoCkholdcrs equ y for
2014is

(a) thC payment of a cash dividend to common sharcholders

(b) thC payment of a cash dividcnd to prcferrcd

sharcho1dcrs,
(c) the issuance of ne v sharcs of common stoCk

(a) 10093.

(b) 9093
|f:i1ncd as

(d)133%.

71%

r : 6.
(a) $7.00.

1n

sho ncom

Thc rcturn on CollllIlon stockholders equity is dc(a) net inc me divided by tota1assets

bcforc income taxes $700,000, income tax expcnse $210,000, and nct incomc $490,000 If Nadecn has
100,000shares of co 1Inon stock outstanding throughout thc yea ,earnings per sharc is

(b) cash dividends divided by averagc common stockholders cquity.

(c) inc lnc

aVai1able

to

collln10n

stockho1dcrs

dividcd by average con11 on stockholders equity

(b) $490 (c) $210 (d)No corred answer o ghcn

(d)Nonc f

thesc is corrcct

(a) What is a dividendP(b) Dividends rnust bc paid

in cash.

7.Gorton Corporation has 30,000 sharcs of $10 par

value common stock outstanding vhcn it announccs
a2~fo 1stock spht.Bcfore thc spht,the stock had a markct pricc of$120pcr share Aftcr thc spht,how tx/i11 many sharcs of stock `i11bc OutstandingP What
be the approxilllate n1arket price pcr sharc?
8

Do you agrce?Explain

2 Jan B Il ler maintains that adequate cash is the on1y rcqt ircment for the dcclaration of a cash dividend Is

Jan correct?Exp1ain : (a) Threc datcs arc impol tant in connection vith cash dividcnds Identi thCse dates,and cxp1ain
their significancc to the C0rporation and its stock-

Thc board of directors is considcring cither a stock spht or a stock diVidcnd They understand that total
stockholders cquity villrcmain the samc undcr eithcr

holdcrs
(b) IdCnu the accounting cntrics that are1nade for a cash dividcnd and thc datc of each cn")1
:

action Hoxkrcve they arc not sure of the di ercnt

cffects of thc txvo tvpes of actions on other aspects of st ckholder equi Explain the diffcrenccs to the

|.Farley Inc declares a $55,000 cash dividcnd on

Dcccmber31,2014,The rcquircd annual dividend on
nc thc a11ocation prcfcrred stock is$10,000.Detcr ofthc dividcnd to prcfcrrcd and colll1uon stoCkho1ders assu 1ing the prefcrred stock is cumulative and divi-

dircctors

9.Wh

is a prior pcriod a ustmCnt,and how is it

dcnds arc onc year1n arrears

,Contrast the cffects of a cash dividend and a stock

j,Rich Mordica asks, Sincc stock dividends don1

change anything, vhy dec1are thcm? lA/hat is your answer to Rich?

dividend on a corporation1sba1ancc shect

j F nh bdancc d AP $230,000on Janual r1 During the yca a prior period f $50,000 is recorded because of thC a ustment undcrstatcment o dcprcciation in thc prior period
shoxkzthe rctaincd earnings staten1cnt presentation of thcsc data

578

4cOrporations DiVidendsf Retained EarningsJ and Income Reporting

income is.The stock pricc tcl1s lllc cvc9thing I JL

11.Vhat is thc purpose of a retained earnings restriction?Identifv the possible causes of retained earnings
restrictions

12.Ho v are rctaincd carnings rcstrictions general1y rcportcd in thc nancial statcmcntsP 13.Idcnt" thC Cvcnts that result in dcbits and crcdits to
rctaincd carnings.

Hoxkl do you respond to Dcan? 16.What is the unique feature of a corporation inc statcmcnt? I11ustrate this feature, using ass== data
to kno v!
17

Why must prcfcrrcd stock dividends be subtr

f1

on1netincomc in computing earnings per shar

`ere the amounts of basic carnings per shr

14.Ra FurcaI bcheves that both the beginning and ending balances in retained earnings are shoxvn in the
st ckh lders

18.Vhat

||

common stock that Apple rcportcd in the ycars

l}

equity section Is Rafv correct?Discuss. net

to2011P

15.Dean Percival, vho oxNrns rnany inVestmcnts in co

mon stock,says, I don1carc what a company

B 14 Greenxvood Col poration has80,000shares ofcommon stock outstanding It declares a$1per share cash dividcnd on Novcmber1to stockholdcrs of rccord on Dcccmber1.The

PJ ey, r

lzrJ

s forn c1Ij

fvf d

dividcnd is paid on Dcccmbcr31.Prcparc thc cntries on the appropriate dates to rccord thc dcclaration and payment ofthe cash dividend,
BE 4 2

(LO1)`AP
Prgp@ r/j s
rvJd 9zd
for sr

Langlcy Corporation has50,000sharcs of$10par value co 1Inon stock outstand-

ing,It dcclares a159b stock dividend on December1 vhen the market price per sharc is $16 The dividend shares are issued on December31 Preparc the entries for the dcclaration and payn1ent of thc stock dividend. BE14 3 The stockholders
eq1 ity

(LO1)`AP
S oll3 ro
srock

section of Prctzcr Corporation consists of comn1on stock

re-and-affer cffccts of

($10par)$2,000,000and retained earnings$500,000A1093stock dividend(20,000shares)

is dcc1arcd whcn thc rnarkct pricc pcr share is$14 shoxxz thc bef
the dividend on thc folloxving,

vJ ,,

(LO1)jAP

(a) Thc componcnts of stockho1dcrs (b)Shares outstanding,

(c) Par value per share
B 4 4

cquit5

For the year cnding Dcccmbcr31,2014,soto Inc.repo1ts net incomc$170,000

1ing the

Pr

f d

and dividends$85,000 Prepare the retaincd carnings statcment for the year assu ba1ance in retained earnings on Janua y1,2014, vas$220,000.
B 14 5Thc

` sr r /zr

(LO2)`AP
P p
sr F ,,, Jl/

balanccin rctaincd carnings on Januaw1,2014,for PahncrInc. vas$800,000 During the yea the corporation paid cash dividends of$90,000and distributed a stock dividcnd of$8,000 In additi n,the company dctcr ned thatit had undcrstatcd its deprcciation cxpcnsc in prior years by$50,000 Nctincomc for2014vas$120,000 Prepare the

'

n Jz d
`

(LO2)`AP

retained earnings statcmcnt for2014.

8E 4 6SUPERVqLU,one
taken f1 on

of the largest grocct /rctailcrs in the Un cd states,is headquartered in N nncapohs.suppose the fo11o ng fnancia1information(in 11ions)xvas the company 2014annual repoIt net salcs$40,597,netincome$393,beginning con11non stockholdcrs cqu y $2,581 and ending co n n stockholders equity $2,887 Compute the retum on common stockholders equity. BE 4 7 Vhctzcl Col poration repoIted nct income of$152,000` dcc1ared dividends on common stock of$50,000,and had an ending balance in retained earnings of$360,000 Common stockho1dcrs cquity `as$700,000at thc bcginning of the year and$820,000at thc end ofthe yea
Computc thc rcturn on common stockho1dcrs equity
BE14 8 Thc fo11owing information is ava ab1c for Rcinsch Covoration forthc year ended

C4Fc r /,z

Co9,f 70 sroC/C/Po1de`- fP=

(LO3)`AP

Col9zp

r/z rfJ'
{

Co,lzl,zo ~sroC /, f - f==Ji

(LO3)`AP
P/ep/I co/pomre :JIr
sr r 9zr

December31,2014 cost of goods sold$205,000,salcs rcvcnue$350,000,othcr revenues

and gains$50,000,and opcra ng expenses$75 prepare an income statemcnt for thc con1pany
000

Assun ng a corporate tax ratc of30q3

(LO4)`AP

Exercises
BE 4 9 zieglcr Corporati n repo1 s

579

nct incomc of$380,000and a weighted-average of

Colllpute thc earnings per sharc

:: u

comm n
:

Co
`z/ (LO5)`AP

4/,zj gs`
's

stock outstanding for the yca

BE14 1o Income and colllllaon stock data for Zicgler CorporaJon arc prescnted in BE14~9.

: ;: :
t
1

:JFI :

;; : F
:ll;:

Co91zpzJ 2f9z :s` r sJ z

fr c ,,9 Ir e`/ 99e
l

?
`

srock

(LO5)`AP

E14 0n
k

Janual r 1, Gu len Corporation had95,ooo sharcs of no-par common stock occurred.

the

i= owlng

xucd and outstanding The stock has a statcd valuc f$5pcr sharc During the yea

JozJ'9z lJz c s/z jVfd s

,zrljc r sr re,Pze,z se zr /J ,z

Issucd25,0o0additional sharcs f common stock for$17per share. sh c ockhdd s d Kco on Junc s F Dec 1 Issued2,000add tional shares of c mmon stock f r$19pcr share.
15 Declared a cash dividend on outstanding shares of$120pcr share to

pr

(LO1)`AP

stockholders of record on Dccember31

rrJrc o s

i: at Dccember31P
elll cl

(a)T ta dividends declared

$266`400
A//oc n?c s/ zd v r/e s ro

issucd2,0oo sharcs f$50par value prefcrred stock and100,000shares of$1o r valuc common stock At December31, the c mpany declared the follo ving cash

14 2 Knudsen Corporation was organized on January1,2013 During its nrst yCa the
: poration

prFd c ,9z9,z0
(LO1)

sr0C

idends 2o13,$5,000;2o14,$12,000;and2o15,$28,000.
r, Jrcr

AP

oPIs
Dividends t preferred

)Sho/thc allocati n of dividcnds to cach class of stock,assu 1ing the prefcrred st ck dividend is693and noncumulativc.

dividend is793and cumulativc. n ofthe cash dividcnd at Dccember31,2o15,under part(b). :i: l l;;: : :esE fcommon stock at par on July I and earned netinc me of$400,000 ::0shares ` -Icr rnahzc thc declaration of a15%stock dividcnd on Decembcr10,2014,for the fo11o
|Journahze the dcclaratl
i

)sh w thc a1location of dividends to each class of stock,assu 1ing the preferred stock

(a)2015$6`000 (b)2015$7`000

Jo
`Fz (LO1)`AP

sroc 'fvf

iI

Il1:

lndcpcndcnt assumptions.
Par value is$1o,and1narket pricc is$18
Par value is$5,and rnarket price is$20.

v~

Debit t Retained Earnings

4 0n October31,thc stockholders

(a)$378`000 (b)$720 000

11

equity section of Heins company consists of

mon stock$500,000and retaincd earnings$90o,000 Heins is considering the f

Mrj Courscs f acti n (1)declaring a5q3stock dividend n thc5o,00o, $1o par value l rcs outstanding,or(2)effecting a2-fol 1stock spht that 11reduce par va1uc t $5pcr
~^ 1~ . ^~ ~ .The currcnt rnarkct price is$14per share,

wing

Co,9zp zzc s c
7iFj

vf Pz

lzd sroc

~sp`J/

(LO1)`AP

rc a tabular summap/of the cffects of the alternative acti ns n the componcnts of

1oldcrs
ings

cquity outstanding shares,and par valuc per share.use the fo11owing coIumn Before Action,After stock Dividend,and After St ck spht.

Par value after st ck

dividend$10j after stock

sp"t$5

580
riz fc

14c rporations Dividends`Retained Earnings`and lncome Reporting

F

CCozz rD zc s
rl

E 4 5

0n October1,Little Bobby Corpora on stockh ldcrs

cquity is as fo11oxxzs

sr0C rr

vftfe,zrF

(LO1`3)`AP

Common stock,$5par va1ue

Paid in capitalin cxccss of par~common stock

$4o0,000
25,000

Retained earnings
Tota1stockho1ders equity

155,000 $580,000

on October1,Little Bobby dec1ares and distributes a1093stock dividcnd vhen the n1arl
pricc of thc stock is$15per share
(b)C mm n stock$440`000 Paid in Capita|in Excess of Par Common stock
Js
9 s

(a) ',rcr Compute the par value per sharc(1)beforc the stock dividcnd and(2)after the st i dividend
(b) Indicate thc balances in the thrcc stoCkholders

$105`000
Retained Earnings$35`000
rllJfc r c,//ecrs o

equ y accounts aftcr the stock dhidc

shares have been distributed,

14 6 During2014,Rob1ez Corporation had thc fo11o

1. Declared a cash dividcnd.

ng transactions and cvcnts

sroc /zo` co
`ers /s

gzJ rsl

`olze (LO1`2`3)`AN

2.Issued par valuc common stock for cash at par valuc.

ck vas changed t $5 value stock 4. Dcclarcd a sn1a11stock dividcnd vhen the rnarkct price xhras higher than par valuc 5.Madc a prior p oda ustmel.t brov atcmcnt of net hc me, 6. Issucd thc sharcs of common stock requircd by thc st ck dividend dcclaration in it

3.Completed a2-foF1stock spht in which$10par valuc st

:t

no,4abovc.
7.Paid the Cash dividend in itcIn no 1aboVe 8.Issued par valuc c 1Inon stock for cash above par value
r9,sfr/J

crJo9Is ld:r|
c

Indicate the effcct(s)of cach of the foregoing itcms on the subdivisions of stockh
Cqui0 incrcasc

Present your answer in tabular form with thc fo11owing columns.Use(Il f

(D)for decrease,and(NE)for no cffect Iten1no 1is given as an cxample

Paidin Cap al
Cap al
IteIll
1

Ret ned Additiona1

Ean i gs

stock

NE

NE

D
:c

P p4
rl

cor/c,crj g r'f s ro/

v d ,z s ,z

sr c s`/Jr

E14 7 Bcfore preparing nancial statements for the current yca the Chief accountant Toso Company discovered the fo11o unts.

(LO1)`AN

1. Thc declaration and paymcnt of$50,000cash dividend vas recorded as a debitto Intc1 sl

`ing errors in the acc

Expcnsc$50,000and a Cred to Cash$50,000.

2.A1093st ck dividend(1,000sharcs) vas declared n thc$10par valuc stock sVhen=1= market price per share was$18The only enti n1ade was stock Dividcnds(D )$10C
and Dividcnd Payab1c(C )$10,000 The sharcs have n t bcen issued,

3.A4-fo 1stock sphtinvo1ving thc issuc of400,000shares of$5par valuc common stciJ1 for100,000sharcs of$20par valuc common stock vas recordcd as a dcbit to RetaiL:
Earnings$2,000,000and a credit to Corlllllon Stock$2,000,000.
rP srrJJc

Jo,as

Prcparc the corrccting cntries at Dcccmber31,

PJcp re
sr
r 7 ,zr

r r4`

ed Jvzj gs

E14 8

0n Januay1,20I4,Eddy Col poration had retaincd earnings of$650,000,Duh

the yea Eddy had the fo11 ong sclccted transactions,

(LO2)`AP

1. Declarcd cash dividends$120,000

2. Corrccted oVerstatement of2013netincomc becausc of depreciation error$40,000 3.Earncd netinc me$350,000 4.DccIarcd stock dividends$90,000
r,

s Jcf o9rs

Ending ba|ance$750 000

Prcparc a retained earnings statcmcnt for the yca

 J l f
)iation expenscvas rccorded at$70,000,but
)clared and paid,

Exercises

581

Pr @

s 2 F

9t f de j

(LO2),AP

tr1butcd whcn thc rnarkct pricc pcr share was

4,Net hcome was$285,00o

r r'%c s Prepare a retaincd carnings statcment for2o14,
9

:
uIty
rPIsrP

;::
t

bhed earmngs
g

sFOc
`'

secrf lz

(LO3)`AP

: l
r/c o, s

00 r$

l FrCthest

ckhddcrs cqu ys uon

mpanys Dccemb
c

31,2o14 balance

h lde

:: c1Jl

[c :

: cc

unts appear in the ledger of H rncr Inc,after thc b ks arc

: ;

u
g frl

Ple/, sroc & ~sccr`o9z

`s

Common st ck,no pa $1statcd value,4oo,ooo shares authorizcd;

300,ooo shares Issued
Co1Inon Stock Dividends Distributable Paid~in Capitalin Excess of stated

(L03)'AP

$ 300,0oo

& Retained Earnings

vu

:%,4 000sh

hlue__collalll

n stock

30,0oo 1,200,ooo
150

ooo

rreasury Stock(10,000common shares)

Paid n Cap aIin Excess of Par~Prcfe cd st ck

800,ooo 74,ooo

344,ooo , s ng ed rmn

:11 f :| : :

t :;i

:;l

equ ty

e 9zf/zc l9z

a cs utstanding entire ycar during the rP=rc oP s

p p

sr 7 /

(LO4`5)`AP

em :J; 1y
11

(a)Netincome$129`5oo
P p
egzz

f;

ckll lder
f I

z/zCozzz

sr

z /

,zr/co,JzpzJr

rzJ9,z OPz
`i

(LO3`4)`AP

l % e (b)203% EPs s1 : J : : :
,
Co99,P
r

(LO4`5)`AP

582
EPs$215
C

4Corporations DividendsJ Retained Earningsf and Inc me Reporting

r sr c ? s

Computc Ringgold 2014carnings pcr sharc

rj sr0 v
`zz

' `czJ/rl @9,zj9zgs p 9Jofl,z 9zCe

E14 5The f Ilowing nnan al informat0n o availablc for Plumm

Col poration.

(L03`5)`AP
:

Nctinc me

Dividcnds paid to prefelred stockh lders

:
oPJs

:F

2014
$1,200,000 50,0oo

2013
$900,000
30

rs

000

arkct price of con11non stock

0oo 290,0oo 20
20

20,0oo

200,0oo
15
r

Thcvcighted~avcrage number of sharcs of common

2013and10o`ooo for2014. 2014EPs$27o

mi ` bob

stock outstanding was80,00of

rPas r,rCr

Calculate eamings per share and rcturll on common stockh

E14 16

lders

equity for2o14and2o13

Cn`c r rj sr0 v z`zJ zr(z `'

p J/o9PJ z /ZC

This nnanciaIinformation is ava ab1e for inger Col poration.

(LO3`5)`AP

2014

2013
$1,900,000 70,000 20,00o
191 ooo

j1 ; I

Netinc me

Dividcnds paid to prefe ed stockh lders

fI:

:;; :l:rs

$1,800,000 90,000 20,00o

Iarket pricc of co 1Inon stock

200,00o 20 of common stock outstanding

25
`as180,ooo f
r

Theveighted~avcragc number of sharcs

2013and15o,ooo for2014.
EPs`2014`$120
Co 499z zzg~sp rs/z `pflJ+e ? r ss ,Jzprfo zs

rmsr' c s

(L05)`AP

'

rPJsr % co s

W%
$241,000.
I1

$225 (b)$250

F :
i
1ative.I/Ii11 v d

jons.(Round to two deomals.)

Computc the camings per share ofc

Illon stock undcr thc fo

o ng

indcpendcnt s ua-

chaIlge

as not declared The prcferred stock is cumu-

held1o,ooo sharcs of common treasury stock throughout the year

P p r/ v F 9lr/ 9zrrf s 9zd

sroc o

` 's

P14 1^onJalltlaw1,2o14,Ge

qzJrrA s c fo

KyCovorationhaddlefon ingstockholders equ y

accottllts,

Comm n Stock($2o par va1uc,6o,ooo shares issucd and

outstanding)
Paid~in Capitalin Excess of Par_

Retained Ean ings Feb. 1

~ a

Common stock

$1,200,000
200 ooo

600,0oo

During the yea1 the fo11o ving transactions occu cd,

Declared a$1cash dividend per sharc to stoCkholdcrs of record

payable A/Iarch1

n Fcbruary15`

Paid the dividend dec1ared in Fcbruary

Prob ems

set A

583

Apr 1
JuIy 1

Announced a2~fo 1stock

was$36
sharc

spht.Prior to the spht,the Inarket price pcr sharc Ckholdcrs of rccord on July15,
st ck

Dcc1ared a10%stock dividend to st

di obutab1e

July31 on July1,the market p ce fthe

was$13pcr

31

Issucd the shares for thc st ck dividend

Dec

DeClared a$050pcr sharc d dcnd t stockho1ders of rec rd on Deccmber15, payab1e January5,2015 31 Determined that nctincomc for the year was$350,000.

IposrrBdc o9 s

(a)Journahzc the transactions and the closing entries for netincome and di idends. (b)Enter the beginning balances,and postthe entries to the stockho1ders cq11ity accounts

/zc c cc gz `1's yo``scc rro Pror, ,9,s lc, O s/zr,"` F/zc9s/z/ rs

F

or open additional stockholders cquity accounts as necdcd) (c) Prepare a stockho1ders cqu y scction at December31
P 4

(c)Tota st ckh lders eq uity

$2`224`000
JozJrlz /rz p s rr s Crfo pp4 r ed 9,9j sr r 9zzeflr lzrl sroc /, 1ders zl s cF Pz
(

2A The stockh lder equity accounts of Kal p Company at January1,2014,are as

Prefel

roll ws

ed Stock,6%,$5o par Colllrnon Stock,$5par

l

$600,000
800,000

Paid~in Capitalin Exccss of Par_ Prefcrred St ck

Paid n Capita1in Excess of Par~C n1Inon Stock

Retained Earnings

200,000 300,000 800,000

(LO1`2`3)

AP

There wcre no dividends in a ears n prefcrred stock.During2014,the company had the fo11owing transactions and cvents. July 1

Aug. 1

Declared a$060cash dividend per share on common st ck, Discovered$25,000understatemcnt f2013dcpreciation on equipmcnt
(Ignore incomc taxes.)

Sept. 1 Paid the cash dividend dcclarcd on Ju1y1, Dec. 1 Dec1ared a159 stock dividend on con11tlon stock whcn the rnarket pricc ofthe

stock was$18per sha

15 Declarcd a69 cash dividend n preferrcd stock payable January15,2015

31 Dctermincd that netincome for thc year was$355,000

31

Recognized $200,000rcstricuon

f retaincd earn ngs for p1ant expansion

pos rmsrr c

fa) Journahze the transactions`events,and c1

lc) Prcparc a retained carnings statcment for thc year ld)Prepare a st ckholders equity section at December31,2014
P14 3A

b)Entcr the beginning balanccs in the aCcounts,and post to the stockholders accounts. No r open addiuonal st ckholdcrs cqu y accounts as nceded)

sing entrics for net income and dividends equity

(c)Ending ba a nce$566`000
(d)TOta
st ckholders

equity

$2`898,000 P' 9zer/ J

sr r 9/, r oZr/ 6
9t 9fJr

The post~c1osing trial balance of Storey C rporation at Dcoember31,2014,

Preferred st ck(15,000shares issued)

:ontains thc f 11o ving stockholders equity accounts.

'sFOc rFfJjF s Crfo,F, ,zrl C0

Common Stock(25o,000shares issued)

Paid~in Capitalin Exccss of Par_Preferred stock Paid n Cap a1in Exccss of Par~Con1Jl on Stock Co un n stock Dividends Distributable Retained Ean ngs revic v of the accounting rccords reveals the fo11o ving,
1.No el ors haVc been rnade ih rec
t

$ 750,000
2,500`000

c ds 9ar/ frlJv
r

Jl,gsp

e,

250,000 400,000 250,000 1,042 000

(LO1`2`3`5)`AP

's/a

rding2o14transactions or in preparing the closing

enty

f r

netinc

me,

2,Prefcrred stock is$50pa 6%,and cumulative;15,000shares havc been outstanding

since January1,2013

584

4c rporations DividendsJ Retained EarningsJ and Income Reporting

3.Authorized stock is20,ooo shares f prefcrred,5o0,000sharcs f conunonoth a$10
par value

4.The Janual r1ba1ancc in Retained Earnings `as$1,170,000 5. On July1,2o,oo0shares of cOIlntllon stock were issued for cash at$16per share

6.On Septcmber1,the company discovcred an undcrstatcment c or of$90,000in c puting dcpreciation in2013,The nct f tax effcct of$63,000 vas propcrly dcbited
direcdy to Retained Earnings. 7. A cash dividend of$250 000was dcclared and propcdy a11ocated to prefcrred and Co Hnon stock on Octobcr1,No dividends verc paid to prcfcrred stockho1ders in 2013.

8. On Dccember31,aI093common st

ck dividcnd x/vas declared out of rctaincd earn-

ings on comm n stock whcn the market price pcr share was$16, 9.Netincome for thc ycar was$585,000 10.On Dccembcr31,2014,the d rcctors authorized disclosure of a$200,000rcstriction of
rctaincd earnings f r plant expansion (Usc Note X)
r9 sr'Jtc oPrs

(a) Rcproduce the Rctained Earnings aCCount(T-account)for2o14.

(c)T ta stockh ders
$5

equity

192`000

(b)Prcpare a retaincd eamings statcment for2014. (c) Prcpare a stockholders equity section at Deccmber31,2014. (d)Compute the a11ocation ofthe cash dividcnd to prefcrred and c 11non stock.
P14 4A

Prgp ,er/ze~sroc`t/zo/z/eJ

q f~s cFfo cFJ g ` rl`v fztls@lz f9`f/ `

` `srock (LO1`2`3)`AP

accounts.

On Janua 1, 2014, n

Col poration

had thc f 11o ving stockholders equitv $1,600,000

Co 11non stock(no par va1ue,90,oo0sharcs issucd and outstanding)

Rctained Earnings
During thc year,the fo11 ng transactions occurred.

500,000

Fcb
rv

Dec1ared a$1cash dividcnd per sharc tO stoCkholders of record on FebrualxJ

15,payable N arch1.

ar 1

Paid thc dividcnd declared in Februa91

Apr 1
July 1
31

Announced a3fo was$36.

1stock spht,Prior to the spht,the1narket price pcr share

Dec1ared a59 stock dividend tO stoCkholders of record on July15,distributable

Dec 1
31
r, sr,

i ; ; Determhed th
: :
I I
l

ck a

rC dividend to st Ckholders of record on Deccmbcr15,

iI

1f1

nct hc me for the year was$350 000.

(d)Total stockholders equity

$2`218

,c oms Prcpare the stockh

250
o/rle
cr ,zg

lders

(c)scptember30,and(d)Dccembcr31,2o14.

cquity scction ofthc balance shect at(a)N arch31 (b)June30

P'p@ r/ze sroc grlf

secrjo , `

p 4 5A On JanualhJ 1,2014,she1lcnburger Inc,had the fo11oxving stockholders account baIances.

equity

V / 0zrsVe,zrs

(LO1`2`3)`AP

Common stock,no-par value(500,000shares issucd)

Co Hnon Stock Dividends Distributable

$1,500,000

Rctaincd Earnings
During2014,thc fo11 ving transactions and cvcnts occurred. 1.Issued50,000sharcs of co

200,000 600,000

Dccembcr15,2o13.

11n n

stock as a result of a10%stock dividend declared on

2. Issued30,000sharcs of c mm n stock for cash at$6per share. 3. Co ectcd an crror that had understatcd the netincomc for2o12by$70,000 4.Dec1ared and paid a cash dividend of$8o,000.

5.Earned nctincome of$300,000,

Total stockholders

equity

r9Is c P,s

$2`770`000

Prcpare the stockholders equity section ofthc balance sheet at Deccmber31

2014.

Broadening YOur Perspective

587

Ethics Ca$e
tive
qualterly cash dividcnds(15years).Thc last

c s
,

wh f
j1 pa E 1 w: :; ;J
F :1
:

fns

c ,Is

u
FAsB C dIficat:on Activlty
BVp1

9 ,/o" h dh a mb pu nt t Login.cfm tol g in and prepare responscs t tJ a)Whatis the st ck dividendP

J :

n,go http://aaahq0rg/AP i%
aJ

UH

B opposed t a st ck sr

dditi nal sharcs quahs,as a st ck dividend,as

Answers to Chapter Questiofls

p.565up,DowIl,andPP Q:V hat
AnsWers t Insight and Acc unting Across the Organizati n Questions

o
u

vth oppoltunities,an( ,expccted future earnings,

P

569A No

:fj;t Jpp scd t tradcrs v l only hold their invesll lcnt for a sh rt pc od oftimc `h a high st ck price discouragcs sh
rt~term investmcnt, Answers t
seIf Test

rett prcfcrs to attract shareholders wh

t osophy o Whyd

necds,the company mpany sustain bascd upon

l

h ol s must managemcnt considcr n deciding how1arge a

ed ca1

1cc

: :

I)i

vi11be ablc t

v 1Fnake :T;;:I

F
Hc behcvcs that
$30) 6 d 7 c
0 oo

Questions

b dm b" 000
sl,400,00o; ($I26,0oo
14 d 15 13.b

1.a 2 c 3 c 4 a$80,00o_[(3,o00

b($490,00o
1o0,ooo)

0:JP

79

$100)

d(100,00o 10% 6L2o 0oo+ d ($176,00o ~ $66`000 - $2o

2] 5

= 2

000) 30%

2=

562

4Corporations Dividendsf Retained Earnings`and lncome Reporting

Prepare the entries for

cash div

dends and stock

divIdends,

A dividend is a corporation d bution of cash or stock to ns st ckholders on a pro rata(propo Lional to owIlershp)basis PrO rata Ineans that if you non shal es,you xN, 1receive10q3of the dividend.Dividends ovn10qa ofthe co sso note to pay cash),or can t e four fonms cash,prOpe ,scrip(a pro 1inate in practice.A1so,companies declare stoCk stock Cash di idends predo forms of dhidends are the focus of dMdends wi somc f equency.These t
1

discussion in this chapte

Investors are ve interested in a company1s dividcnd praGtices In thc nan-

0al pres, dends are generaIy repo ed quartedy as a dollar amount per share.(somejmes they al e repo ed On an annual basis )For examp1e`b ke quar0edy d idend e in the fou h qua er of2011was36cel ts per share Thc dend rate for the fouIth qua er of2011for GE vas15cents,and or ConAgra di
Foods1t vas24cents

Cash DivIdends
A cash di idend is a pro rata dis bution of cash to stockholders Cash dividends are not paid on reasu shares For a co oration tO pay a cash dividcnd, it must have the fo11owing.
t5

ings Thelegahty of a cash dividend depends on thelaws ofthe 1. Ret ned ear state invhich the company is incorpOrated Payment o cash dividends f1 om

retained earnings is1ega1in a11statcs

f1

In genera1,cash dividend distributiOns

om ol ly the balance in common ock llega1capitd)are i11egd. l is tel ll ed a liquidating di dend idend decl Fed out of paid-in capit A di
v

such a di idend reduces or hquidate the amount o gina11y paid in by stock-

ho1ders.statutes va considerab1y

tll respect to cash di idends

based on paid-

in cap d in excess of par or stated va1ue

Many states pe nit such dividends

2.Adequate cash The1egahty Of a dividend and the abi1ity to pay a dividend ke` vith retained earnings of over are t vo diffcrent things For examp1e,
$5.8bi11ion,cou1d1ega11y dec1are a dividend of at1east$5.8bi1hon cash ba1ance is on1y$1.9bi1hon
But N ke

Before dec1aring a cash dividcnd,a company board of directors must carefttlly consider both curent and ftlture demands On the company1cash resources In some cases,Cu ent1iab ities may make a cash dividend inapprOpriate.In Other cases,a rn or p1ant cxpansiOn program may warrant only
a re1ative1ysma1l dividend

dends A company does not pay dividends un1ess its board of 3. Declared d

directors decides to do so,at which point the board dec1arcs the diVidend, The board of directOrs has fu11authority to deter 1ine the amount ofincome to distribute in the for1of a dividend and the amount tO retain in the business DiVidends do not accrue like interest on a note payab1e,and they are not
a1iability unti1declared.

The amount and thning of a dividend are importantissues for rnanagement to consideI1The payment of a1arge cash dividend cou1d lead to liquidity prob-

1cms fOrthe company on the Other hand,asma11dividend or a Iuissed dividend

may cause unhappiness among stockholders. Iany stockholders expectto receive
a reasonab1e cash paymentfI olll the Company on a periodic basis lN/Iany cOmpanies dec1are and pay ca h dividends quarte1 ly on the other hand,a number of

high-growth companies pay no dividends,preferring tO cOnserve cash to finance

ftIture capital expendituies


DivIdends
EN s Fo C s o V D s Three dates are impo antin connectio
{:

563

l1s
;J 1 ;j

s:

1 IJllIr;::ke

?: fiI:l:t :: %1 11 acc unting entries on the dec1aration

on the decIaration date,the board of directors forma11y declares(authoHZes)the cash dividend and announces it to stockho1ders.The decIaration of a

To i11ustrate`assume that on December1,2o14,the directors of Media Gen~

r::
Dec
1

: : liI r
DecIaration Date
50

Cash Di dends Dividends Payab1e

(To rccord declaration of cash di

00o
50,0oo

idend)

-50`000Div +50`000
Cash FI ws no crfcct

::I l: mpany transfers the balance of that :;; %B : iDration supply this information.In th( F i t : =` rporation Iiability recognized On the declaration date is
r l

1:
;

jF
i:

edia General debits the account Cash Dividends. Cash dividends decrease

I:l

:;;j1

l;

t:i

:: :;e the c

Record Date Dec,22 I

No ent

on the payment date,the company rnakes cash dividend payments to the ockholders of record(as of December22)and records the payment of the
idend
dte1s

If January20is tlle paymel t date for Me a Genel al, the entI on that
Pa,Ine t Date

Jan 2o

Dividends Payable

Cash
(To record paymcnt of cash dividend)

50,000

| 50,000

=
-50,000

-5o 0oo
Cash FIows

ud totaI assets.I11ustratiOn14~1sun
1In
i

-50,000

ed vith

dividends for Media General

564

14CorpOrations DiVidendsJ Retained Earnings`and lncome Reporting

1

I"ustratio"14
Key dividend dates

LL|| s ;
m

s M T1

"

Th

; %

Io o 1

27

Record date

Payment date
The company
issues dividend checks

Registered shareho ders are e"gible for dividend

As explained in Chapter13,preferred stock has priOrity ovcr co 1Inon stock in regard to dividends. Holders of cumulative preferred stock n1ust be pa d any 1Inon unpaid prio year dividends and their current vear1s dividend before cO
stOckholders receive dividends
To i11ustrate

assume that at December31,2014,IBR Inc has1 000shares of

8%,$100par value cumulative preferred stock It alsO has50,000shares of$1 0 par value common stock outstanding The dividend per share for preferred stock

is$8($100par value 8% .The required annual dividend for preferred stock is therefore$8,000(1,000Shares $8),At December31`2014,the directors dec1are
a$6`000cash dividend.In this case,the entire dividend amount goes to prefered
stOckholders becausc oftheir dividend preference.The ent1

to record the decla-

=
+6,000

+
-6`000Di

ration of the dividend is

Dcc31

Cash Divldcnds
Dividcnds Payable (To record$6per share Cash dividcnd
to preferred stockholders)

6,000 6,000

Cash FIows
no cfltct

Because of the cumulative feature,dividends of$2($8

$6)per share

are in arrears on preferred stock for2014. IBR must pay these dividends to preferred stockho1ders befOre it can pay any future dividends to co

mon stockholders Il3R should disclose dividends in arrears in the financial statements,

At December31,2015,IBR dec1ares a$50,000cash dividend

of the dividend to the t ^JO c1asses of stock is as fo1lOws,

The a11ocation

I"ustration14 2
A"Ocating dividends tO preferred

and cOmmOn stOck

Total dividend A11ocated to prefcrrcd stock D v de s lI rea s,20 4(1,oClO $2) 0 5d v e d( ,000 $8)

$50,000 $2,000 8, Cl0

10,000 $40,000

Remainder a11ocated to comn1on stock

Divldends
The ent to recOrd the declaration of the dividend is

565

=
+50`000

+
-50`000Div

Dcc31

Cash Div1dends
Dividcnds Payable
(To rccord declaration of cash dividcnds of

50,000 50,000
no cffcct

Cash FIows

$10,000to preferred stock and$40,000 to Conunon stock)

IfIBR preferred stock

$8,000in dividends in2015

s not cuIl

ulative,prefe ed stockholders receive only Co1Inon stockho1ders receive$42,000.

Vpf DOwn'and
The decision
bel vv sh ws`from2002to2007

`hether to pay a dividend`and how rnuch to payjis a very important management decision As the chart
many companies substantia"y increased their dividends TotaI dividends paid by U s /ered`from390/ to15%
`the tax rate paid by

companies hit record levels 0ne reason for the increase is that Congress lo

investors on dividends received`making dividends rnore attractiVe to investors

Then the financial crIsis of2008occurred As a result`in2009`804Companies cut their dividends(see chart)at the highest rate since the s&P started co"ecting data in 1995 In2010` rnore companies started increasing their dividends

HoWeVeG p tentiaI higher taxes on dividends in the future and the possib"ity of a low
significant increase

growth economy may sta"any

Payouts|Companies that changed d~ ends

: >

Matt Ph|ps and Jay Mi|leG Last Years D dend S ash Was$58B||on`

VVhat factors rnust management considerin deCiding hol/v large a dividend to pay?
(Ans

`erin Broadening Your Perspective)

d C d c L

Firms that decreased dividend(in red)

l//a

SrreeF uma/0anuary8`

2010)`p C5

stock Dividends
A stoCk dividend is a pro rata(proportiOnal to o
IIporation
=

vnership)distr bution of the

o vn

stock to stOckholders.`
al

=;

`hereas a dividend colllpany pays cashdi in adend cash idend,a company issucs shares of stock in a stock A stock

results in a decrease in retained eamings and an increase in paidin cap

566

14corporations Dividendsf Retained Earnings`and Income Reporting

Unhke a cash dividend,a stock dividend does not decrease total stockholders
equity Or tota1assets is,yOu O vn20of its1,000shares of common stock

To lustrate,assumethatyou have a293ownership interestin Cetus Inc.That If Cetus dec1ares a109b stock

dividend,it wou1d issue100shares(1`000 10%3)of stock You wOuld receive two shares(2% 100) Would your ownership interest changeP No,it vou1d n at2%(22 1,100).You nour Wn more shares ofstock,but your own rell
ership interest has not Changed Cetus has disbursed no cash and has assumed no liab
ities

What,then,are

the purposes and benefits of a stock dividendP Corporations issue stock dividends genera11y for one or more ofthe fo11owing reasons
1. To satis stockholders dividend expectations vithout spending cash

2. To increase the rnarketab ity of the cOrpOratiOn stock.WVhen the number of

shares outstanding increases,the rnarket price per share decreases.Decreasing the rnarket price of the stock makes it easier fOr sma11er investors to pul chase the shares

3. To emphasize that a company has pcrmanent1y reinvested in the business

a portion of stOckholders equity, vhich therefore is unava ab1e for cash

div1dends.
nes the size of WVhen the dividend is declared,the board of d rectors deter the stOck dividend and the value assigned to each dividend, Genera11y,ifthe company issues a sma stock di dend(1ess than20-25% of the corporation issued stock),the value assigned to the dividend is the fair va1ue per share This treatInent is based on the assumption that a sma11stock

dividend w 1have litde effect on the rnarket price of the shares previously out-

standing,Thus,many stOckholders cOnsider sma11stock dividends to be distributions of earnings equaltO the rnarket price ofthc shares distributed.Ifa cOmpany issues a Iarge stock d oend(greater than20-25%D,the price assigned to the dividend is the par or stated Value,Sma11stock dividends predolllinate in practice

Thus,xve w l illustrate only entries fOr sma11stock dividends,

$ $ $

To illustrate the accounting for sma11stOck dividends,assume that ed1and Co oration has a balance of$300,000in retained earnings,It declares a1093stOck di i-

dend on its50,000shares Of$10par value common stock.The curent market price of its stock is$15per share The number of shares to be issued is5,000(10% 50,000) TherefOre,the total amount tO be debited to stock Dividends is$75,000
(5,000 $15).The ent1 to record the declaration ofthe stock d

vidend is as follows 75,000 50,000 25,000

+
-75,000Div

stock Dividcnds
Collllllon stock Dividends Distributablc Paid n Capitalin Excess of Par~~Common stock

+50,000CS +25,000CS
Cash Flows
no c cct

(To record declaration of10%stock dividcnd)

Iedland debits stOck Dividends for the Inarket price of the stock issued($15
5,000),(SiInilar to Cash Dividends,Stock Dividends decrease retained earnings)

edland alsO credits Co 1FnOn Stock Dividends Distr butable for the par value of
the dividend shares($10 5,000)and credits Paid~ n Capitalin Excess of Par~ COmmOn Stock for the excess ofthe rnarket price over par($5 5,000) CollIlllon Stock Dividends Distributable is a stockh lders equity account,It
is not a hab ity because assets w l not be used to pay the dividend.Ifthe cOmpany

prepares a balance sheet before itissues the dividend shares,it reports the distrib-

utable account under paid-in capital as shown in I11ustratiOn14-3.

DivIdends
Paid in capital I"ustration14 3
$500 000
statement presentatiOn Of

567

ColInon stock
Coln oIl stoCk di de ds dist butable Paid-in capita1in exccss of par common stock Tota1pa d in cap al

50,000
25,000

cOmmOn stOCk dividends

distributable

$575,000

WVhen Iedland issues the dividend shares, it debits Common Stock Div dends Distributable and credits Coll lI on StOck,as fo11o vs

+
-50,000CS +50,000Cs

Con1Inon stock Dividends Distributab1c

50,000 50,000
dend) Cash Flows
no effect

Common Stock
(To rccord issuancc of5,000shares in a stock d

EF $0 $ 0 Hov do stock diVidends affect stockholders equity?They change the composi tion of stockhoIders equity because they transfer to paid-in capital a portion of retained earnings Howeve total stockhoIders equity remains the same. Stock dividends also have no effect on the par Or stated value per share But the

number Of shares outstanding increases

.l/Iedland Corporation

I1lustratiOn14-4sho vs these effects for

Before

A er

ustration14 4

Dividend
Stockholders equity

DivIdend

stOCk diVidend e eCts

Paid in capital
Collllllon stock

$10par

$500 000

$550,000
25,000 575,000

Paid~in capitalin excess of par~common stock

Total paid-in capita1

500,000

Rctained eamings
TotaI stockhoIders equity

300,000

225,000

$800,000
50,000
$10 00

$800,000 55,000
$10 00

outstanding shares
Par vaIue per share

h this example,total paid-in capitalincreases by$75,000(50,000shares 10% s15)and retained earnings decrcases by the same amount.Notc also that tota1
stockholders
hcl eases

equity remains unchanged at $800,000. The number of shares

by5,000(50,000 10%).

stock sp"ts
A stock spIit,hke a stock diVidend`invOlves issuance of add tional shares to stOckho1ders according to their percentage o vnership.1 o vever,a stock split
resuIts in a reduction in the par or stated value per share The puvose Of a stock spht is to increase the marketability of the stOck by lo vering its market pHce per share This,in turn,makes it easier for the corporation to issue addi onal stock.

The effect of a spht on1narket price is general1y inverseIy proportional tO

he size of the spht FOr exalllple,after a2-fo 1 stock sp1it,the markct price of

568

14corpOrations Dividends`Retained EarningsJ and Income Reporting

Nike1stOck fe11f1

om$111to approximately$55 The lowcr market price stim-

ulated market activity WVithin one yea the stOck vas trading above$100again I11ustration14-5sho vs the efFect of a4-fo 1stOck spht for stockhOlders.

ustration14 5

E ect Of stOck spl"

Before stock sp"t

owned40 ` shares before and l own 160shares now,but l st oWn only l/4of the

fOr stOckhOtders

Nunnber of shares owned increases,but

ercentage of co any owned remains the same

In a stock spht,the number ofsharesincreasesin the same propoItion that par

or stated Value per share decreases For example in a2~fo 1spht,One share of$10

par value stock is exchanged fOr tx/k/o shares of$5par value stock,A stock spIit

does not have any effect on totaI paidin cap aI,retahed earnings,or total stockholders equit But,the number Of shares outstanding increases`and par
,`

value per share decreases.I11ustratiOn14-6shov`s these effects for Medland COrporation,assu ng thatit sphts its50,000shares of co 11non stock on a2-f 1basis,
l ustra

on146

stOCk sp"t effects

Before stock sp"t

stockholders equity

After stock sp"t

Paid~in capital

Conunon stock
Paid in

$500,000
-0_ 500,000 300,000
$800 000

$500,000
-0_ 500,000 300,000

capital in cxccss of par_common stock

Total paid~in capital

Retained earnings Total stockh 1ders equity

outstalad

$800,000 100,000
$5.00

ng shares

50,000
$10 00

Par vaIue per share

A stOck spht does not affcct the balances in any stockho1ders Therefore,itis not necessary to jouma ze a stock sp t. div1dends.
I"ustration14 7
Di efenCes
e eCts

equity accounts.

Il1ustration14-7su1Inarizes the differences bet veen stock sphts and stock

between the

Item
Total paid~in capital

stock sp"t

stock Dividend Incrcase

Of stOck sp"ts and stOck

diVIdends

Total retained earnings

Total par va1ue(Comm n stock)

Par value per share
Total stockho1ders equity

No change No change No changc

Decreasc

Dccrcase
Incrcasc

No changc

No changc No changc

Retained Earnings

569

ett s

companyj Berkshire Hathawayj has t

vo cIasses of shares Unt"recentlyj the company had never sp"t ei

'arren Bu ther class of stock,As a resultj the class A stock had a market price of$97`000and the class B sold for about$3`200per
s

are Because the price per share is so high`the stock does not trade as frequently as the stock of other companies

`ays opposed stock sp"ts because he feels that a lol/ver stoCk price attracts short-term investors He appears wh e more than6m""on shares oflBM are exchanged on the average dayj onIy about JO00 =o be correct For example E!ass A shares of Berkshire are traded Despite Buffett s aversion to sp"ts`in order to accomp"sh a recent acquisition 3erkshire decided to sp"t its class B shares50to1
SCott Patterson` Berkshire Nears Sma er Baby B
`

3uffett has ah

/t/a//S eeFJouma/Onll/,e

lJanuary19`2010)

`hy does Warren Bu

ett usua"y oppose stock sp ts?(Ansvverin Broadening Your Perspective)

As you1earned in Chapter13,retained earnings is netincome that a company

retains in the business The balance in retained earnings is part of the stOckolders claiIn on the total assets Of the corpOratiOn It does not,though,repre=

2
Ident

fy the items

knt a claiIn On any speciflc asset,Nor can the amount of retaincd earnings be sOciated with the ba1ance Of any asset account For example,a$100,000 =alance in retained earnings dOes not rnean that there should be$100,000in h The reason is thatthe company rnay have used the cash resu1ting f1 om the = : cess of revenues Over eXpenses to purchase bu dings,equipment,and other
ets.

reported in a retained

earnings statement,

To dcmonstrate that retained earnings and cash rnay be quite different,Il1usIompan1es

=ation 14-8shoxA/s recent amounts of retained earnings and cash in se1ected

(in m i ns

I"ustration14 8
Retained earnings and cash balances

Retained

Company
Facebook Goo e
Nike`Inc Starbucks CofFee Company

Earnings $ 1,606 20,082 4,885 2 189

(1,375)

Cash
$ 1,512 10`198
1,855

281
2,539

Amazon.com

Remember om Chapter13that vhen a company has netincome,it closes

tincome to retained earnings,The closing entl is a debitto Income Su 1Inary d a credit to Retained Earnings. hen a cOmpany has a netloss(expenses exceed revenues),it alsO closes this mount to retained earnings The c1osing en y in this case is a debit to Retained La ings and a credit to Income sulllllla91This is done even if it resu1ts in a

570

4Corporations Dividend Retained Earnings

and lncome Reporting

debit balance in Retained Earnings Compa es do not debit net losses to paidin cap aI accounts To do so wou1d destroy the distinction betveen paidin and earned capita1.If cull ulative1osses exceed cunnulatiVe income over a com-

pany1s 1ife, a debit ba1ance in Retained Earnings resu1ts

A debit balance in
9.

Retained Eamings is identified as a deficit.A company repol-ts a deficit as a

deduction in the stockholder equity section,as sho vn in I11ustrajon14

I"ustratiom14 9
stOCkhOlders equity w"h de

c"
stock/l

BaIance sheet(partiaI)
older equity Paidn capita1

Con1rnon stock
Ret

ined e gs(dencit)

$800,000
(50,000)

Tota1stockho1der equity

$750,000

Retained Earnings Restrict ons

The ba1ance in retained earnings is genera11y avai1able for dividend dec1arajons.
Iardn Cok poration some companies state this fact For example, Lockheed
states the fo11o ving in the notcs to its financial statements

I"ustration14 10
DisClOsure Of unrestricted

retained earnIngs

At Deccmbcr 31, reta ned eal llings wcrc unrest cted and availabIe for dhidend
payments

In some cases,there may be retained earnings restrictions.These make a

portioh of the retained earnings balance cuI
Restrictions result Ii On One or rnore ofthe fo11o

rently unava ab1e for dividends, ving causes.

1. Legal restrictions ~hdany states require a corpOration to restrict retained

earnings for the cost Of treasur`stock purchased.The restrictiOn keeps

intact the corporatiOn s1ega1capital that is being temporarily he1d as trea-

sury stock. Vhen the company se11s the treasury stOck,the restriction is
hfted

2. Contractual rest

ctions

Long term debt contracts may restrict retained

earnings as a condition for the loan.The restriction hn1its the use of col porate

assets for payment of dividcnds.Thus,itincreases the hkehhoOd that the co

poration will be able tO Ineet required1Oan payments.

3.Voluntary restnctions The board of directors may voluntar y create retained earnings restrictions for specific purposes For examp1e,the board rnay authorize a rcstriction for future p1ant expansion By reducing the amount o

rctaincd earnings ava able for dividends, the company makes mOre cash
ava ab1e for the planned expansion

Companies genera11y disc1ose retained earnings restrictions in the notes

to the financial statements.For examp1e,as shown in I11ustration 14-11`

Tektronix Inc.,a rllanufaCturer of electrOnic measurement devices,had total retained earnings of$774Ini1hon,but the unrestricted portiOn vas on1y$223.8

mi1hon.

Retained Earnings
I"ustration14~11
Disc1osur 0f restrictiOn

571

mn n h0/J,. The C c mpany had un ^^n ed i

thosc req1

: f Wr f ;: iTg&= l ircments,
`

;yn vn c td n dy : : F)w in this account.The net

mcome d a p Or
accounts and report it in tl The correctiOn of an error in previously issued financial statements is kn0
: :

: f yea

dhK

lled

ugh

i I :ll I:

f
pri r

n eq pme h2O13by overstated both net incon 1 1f Tk ent f tl e p or pe od a t tmen

(
1

Rctaincd Earnings
ACCu nulatcd Deprcciati n-~Equipment period)
(To a ust f r undestatcment of deprcci
i

=
ooo
ct

300,0oo

+
-300,ooo RE

nin a

300,ooo

-300

Cash FI ws
no cfft

A debit to an income statement account in2o14is incorrect because the error

Dertains to a prior yea

I""stratio 14~12

Balance,Janu 1,as a u cd

statement presentatiOn Of

p"or pe"od adlustments

$ 800`00o
(300,00Cl)

$ 500,0oo

Again,repOrting the corection

JlCorrect because it apphes to a

1 -11

l total
223 s

: :
vn in I ustrati

mellt wo

be

A compIete retaincd carnings statcment is sho

n14~14 n thc ncxt page

572

4Corporations Dividends`Retained EarningsJ and Income Reporting

Retained Earnings statement

The retained earnings statement shOws the changes in retained earnings dul ing the yea The company prepares the statement f1 on the Retained Earnings account,I1lustration14-13sho vs(in T-account forrll)transactiOns that affect
retained earnings

ustration14 13 1. Nct loss

Debits and credits to

Retained Earnings

retained eafnings

1 Netincomc
2 Prior pcliod a uStmcnts for

2.Prior perod a ustmcnts for

overstatemcnt of net income 3. Cash dividends and stock dividcnds
4 Some disposa1s of tre sury stock

undcrstatement of nctincome

As1ndicated,net income ncreases retained earnings,and a nct1oss decreases

rctained earnings. Prior period a ustInents may either increase or decrease retained earnings Both cash dividends and stock dividends decrease retaincd earnings The circumstances under`svvhich treasury stock transactions decrease retained earnings are exp1ained in Chapter13,page623 A complete retained earnings statement for Graber Inc.,based on assumed
data,is as fO11o vs,

ustratio"14 14

Retained earnings

statement

Ba1ancc,January1,as rcported
Corrcction for understatcment of net income
in prior period(invento1 y error)

$1,050,000 50,000 1,100`000 360,000

1,460,000

Balancc,Janu 1,as a usted

Add:Nctincome
Lcss

Cash div1dends stock dividcnds

$100,000 200,000

300,000 $1,160,000

Balance,December31

Presentation
Prepare and anaIyze a

comprehensive
stockhoIdersf equity
section.

I11ustration14-15presents the stockho1ders equity section of Graber Inc ba i: ance sheet Note the fo11o ving,(1) Co1Inon stock dividends distributable
sho vn

under Capital stock,

in Paid-in capita1

(2)A note(Note R)discloses a

retained earnings restriction

Instead of presenting a deta ed stockholders equity section in the balance sheet and a retained earnings statement,many companies prepare a stocld o1der
equity statel ent This stat ment shoWs the changes(1)in each stockholder
.

equity account and(2)in tota1that occured during the yea An eXample ofa stockho1ders equity statement appears in Apple flnancia1statements in Appendix A

statement Presentation and Ana|ysis

I"ustration14 15

573

COmprehensive stOckhOlders equ"y seCtiOn

stockho1ders equity Paid n capital

Capital stock

9%P fered ock,$100par value,cumu1 he,

ca11ab1e at$120,10,000sharcs authorized, 6,000shares issued and outstanding

Common stock,no pa $5stated value,

500,000sharcs authorizcd,400,000shares issued and390,000sharcs outstanding
Conl non stock di dends d stributable

$ 600,000

$2,000,000

50,000

2,050,000
2,650,000

Tota1capita1stock
Additiona1paid~in capital

In cxcess of par~prefe ed
In cxccss of statcd Va1ue-

st

ck

common stock

30,000 1,050,000
1,080,000

Tota1additiona1paid-in capita1
Total paid-in capital

Rctaincd carnings(see Note R)

Tota1paid-in capitaI and retained earnings
Lcss

3,730,000 1,160,000 4,890,000 80,000

Treasul r

stock(10,000common shares)

Tota1stockholders cquity

$4,810,000

ote Retained earnings is restricted for tuIe c st oftreasury stock,$80,000,

nalysis
estors and analysts can measure profitab ity f1 o1 the vie vpoint of the rnon stockho1der by the return on common stockhoIders equity This o,as sho vn in I11ustration14-16,indicates hoxx/rnany do1lars of nct income e company earned for each do11ar invested by the common stockholders It is

uputed by dividing net income avaiIable to common stockholders( vhich netincome rninus preferred stock dividends)by average co 1rnon stockholders
:=ultv

To i11ustrate,WValt Disney Company beginning oithe-year and end-o:theco unon stOckholders equity `ere$31,820and$30,753rnilhon,respectiVely netincome was$4,687 1i11ion,and nO preferred stock was outstanding,The T rn on common stOckholders equity is computed as fo11ows.
i:r 1

Netlncome
mInus
Preferred Dividends ($4,687 $0)

Average Common
stoCkhoIders'Equity

Return on Common
stoCkho ders'Equity

ustration14 16 Retum On cOmmOn

l

stOCkhOlders

equ"y

and cOmputa on

($31,820+$30,753)
2

15.0%

As shO vn above` if a company has preferred stock, ve ^JOu1d deduct the ount of preferred dividends f1 ollI the company net income to cOmpute $deducted f on tota1stockholders { n stockholders equity

Rcome available tO cOmmon stockhOlders AlsO`the par value of preferred stock equity vhen computing the average co 1-

574

4C0rporations DividendsJ Retained Earnings and lncome Reporting

Income statement Presentation

4 Describe th0form and
content of corporation

Income statements for corporations are the salne as the statements for prop

etorshVs or panersh s except for one thg the reporthg ofincOIle

taXes.

Forin0ometaX pulposes`co orations are a separate legal entity As a resu1t,col pOrations repo1 income tax expense in a separate section ofthe corporation income

income statements.

statement,bcfore net income.The condensed income statement for Leads Inc

in

I11ustration14-17sho vs a1 pica1presentation Note that the cOrporation repo1ts income before income taxes as one1ine ite 1and income tax expense as anotheE
ustratio
14 17

lncOme statement w"h

incOme taxes

sa1es revenue
Cost of goods sold

$800`000 600`000 200,000

50,000 150,000 10,000
(4,000)

Gross pront opcrating expenses

Incomc f1

on1operations

othcr revenues and gains other expenses and losscs

I come

before income taXes Income tax expense

156,000 46,800
$109,200

Netincomc

payable as pal t ofthe a u ing pr cess,Using

=
+46,800

+
-46`800Exp

Companies record income tax expense and the related liabi1ity forincometax 1s the d a fOr Leads Inc ,in 1us a on I4-17,the a usting entry for income tax pense December31` 14`is Incomc Tax Expense Income Taxes Payab1c
(To record incomc taXcs for2014) 46,800 46,800

Cash FloWs
no cfcct

The income statement of Apple(in Appendix A)presents another illustratio

Ofincome taxes

lncome statement AnaIysis

5 Compute earnings per
share.

The financial press fl equently repoIts earnings data.stOckholders and poten

investors videly use these data in evaluating the prostab

ity of a company A
vhich indicaIf

cOnvenient rneasure of earnings is earnings per share(EPs),

the netincome earned by each share of outstanding common stock.

o $ SA DP E

The existence of preferred dividends shghtly comphcates the calculatiOn

EPS.When a corpOration has both preferred and common stock,`s`ve rnust su tract the current year preferred dividend from net ncome,to arrive at incOIn= availab1e to common stockholders I11ustration14-18sho vs the formula l m

compujng EPs
To i11ustrate,assume that Ra11y Inc reports net income of$211,000on 102,500 vcighted average common shares,2During the yea it also declar
2Thc calculation ofthe xkeighted average of common shares outstanding is discussed in advance accounting courses

summary of Leaming0 eCtives 575

I"ustration14 18

Net InC0me

Wei9hted Average

mInus
Preferred Dividends

Con1mon
shares Outstanding

Earnings per

FOrmula fOr earnings p r share

share

: ::

s:: t : vhether or notit is declared Remember that co i idend for the cu ent yea non stock. :anies report earnings per share on1y for co

::

j y
Inc

)e1o

i v net income On the statement.FOr

I"ustration14 19
BasIc earnIngs per share disc1osure

,the presentation is as fo11o vs.

NctinCome
Earnings per share

$211,000
$2

oo

:; : ll::( l F:{ Cnt date At the dec1aratio date,thc entrics are

T r T s
secun includcs all stockholdcr equ y accounts It consists ofbx/o sections paid-in capit il and retaincd earnings

h dividcnd~debit Cash Dividends and credit Divi-

It shou1d also indudc notes to thc nnancia1statcments

:ntnes for cash and stock dividends are

idend~ cash d

inc

cbit Dividcnds Payab1c and credit Cash;sma11stock idcnd_dcbit Collllllon Stock Dividends Distribut;olc and crcdit Co 1Inon stock.

me : 4 nincome
statememts.Thcfom and contentofcorporati
statemcnts arc silllilar to thc statements of proprieto ships and m ipS tll ol c cxCCptio CoVF ol s

: 1

mustrcpo1tincomc taxcs orincome tax cxpcnse1n a separate seCtion beforc netincome in the inco1ne statement.

isposals of trcasu y stock

to ca1cu1ate EPs.

Ih ratl ofthc rnarkct price pcr sharc to the carnings per sharc is called the price/earnings(P`E)

-o Thc nancia11ncdia

report this ratio for common stoCkS hstcd on l

aalor stock eXchanges